Farmer Mac, or Federal Agricultural Mortgage Corp. (NYSE: AGM), has been up against the ropes and reviewing its alternatives.  Things have been so bad that at a $4.10 close, that is down from a 52-week high of $34.93.  If you just went away part of the summer and were thinking how well farmers were doing, that has changed as Farmer Mac’s investments in GSE’s and Lehman have hurt to the point that it cannot adequately make loans to farmers. 

Its choices were to either sell assets or raise cash via securitysales, both of which will ultimately leave it smaller or more dilutedfor existing holders. It appears it has decided to raise cash in a saleof $65 million via the sale of non-voting series B preferred stock. Itslists the investors as AgFirst Farm Credit Bank; AgriBank, FCB; CoBank,ACB; Farm Credit Bank of Texas; U.S. AgBank, FCB and ZionsBancorporation. 

Farmer Mac noted that this financing satisfies its previously announcedintent to implement strategies to restore its capital position and tomeet regulatory requirements.

This comes at a steep price tag for a company in the business of makingloans in a de-leveraged environment.  This perpetual preferred issuanceis not convertible but its dividends are a step-up with year 1 at 10%,year 2 at 12%, year 3 at 14%, and 16% thereafter.  These are redeemablein whole by Farmer Mac after 9 months.

Separately, Framer Mac is naming Michael Gerber as acting President& CEO of the group.  He is replacing Henry Edelman immediately.Mr. Gerber has been on Farmer Mac Board of Directors since June 2007and he has been the President and Chief Executive Officer of FarmCredit of Western New York since 1998.

Shares are up over 40% at this point pre-market.  Investors bettinghere better hope that it Farmer Mac can redeem those preferred sharesin 9 months.  Otherwise, it’s going to have to charge unreal rates on its loans to farmers.

Jon C. Ogg
October 1, 2008

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